Monday, January 31, 2011

Dividends provide evidence of financial strength. Since dividends are paid in real cash, a dividend payment shows that the corporation has proved that it has earned enough cash to pay its loyal stockholders. Companies that use complex accounting rules in order to create net income out of thin air typically cannot afford to pay dividends. As a result it is no surprise that only the companies with the best prospects can afford to regularly raise distributions.

Below I have highlighted fourteen income stocks, which have raised distributions like clockwork for over five consecutive years:

Intel Corporation (INTC) designs, manufactures, and sells integrated circuits for computing and communications industries worldwide. The company announced that its board of directors has declared an 18.12 cents per share quarterly dividend, reflecting the previously announced 15 percent increase from the fourth quarter of 2010. In addition to that the company’s board of directors authorized an additional $10 billion dollars for share repurchases. Intel has raised dividends for eight years in a row. Yield: 3.40% (analysis)

Commerce Bancshares, Inc. (CBSH) operates as the bank holding company for Commerce Bank, N.A. that provides various general banking services to individuals and businesses. It operates in three segments: Consumer, Commercial, and Wealth. The company raised its quarterly dividend by 2.20% to 23 cents/share. This marked the forty-third consecutive annual dividend increase for this dividend champion. Yield: 2.20% (analysis)

Sunoco Logistics Partners L.P. (SXL) engages in the transport, terminalling, and storage of refined products and crude oil, as well as the purchase and sale of crude oil in the United States. This master limited partnership raised its quarterly distribution to $1.18/unit. This is the ninth consecutive annual distribution increase for Sunoco Logistics Partners L.P. Yield: 5.50%

Magellan Midstream Partners, L.P. (MMP), together with its subsidiaries, engages in the transportation, storage, and distribution of refined petroleum products in the United States. This master limited partnership raised its quarterly distribution to 75.75 cents /unit. This is the tenth consecutive annual distribution increase for this dividend achiever . Yield: 5.50%

DPL Inc., engages in the generation, transmission, and distribution of electricity to residential, commercial, industrial, and governmental customers in west central Ohio. The company raised its quarterly dividend by 10% to 33.25 cents/share. This marked the seventh consecutive annual dividend increase for this dividend stock. Yield: 5.00%

The J. M. Smucker Company (SJM) engages in the manufacture and marketing of branded food products in the United States and internationally. The company raised its quarterly dividend by 10% to 44 cents/share. This marked the eleventh consecutive annual dividend increase for this dividend achiever. Yield: 2.90%

Norfolk Southern Corporation (NSC), through its subsidiaries, engages in the rail transportation of raw materials, intermediate products, and finished goods. This railroad announced its plans to raise quarterly dividends by 11% to 40 cents/share. This marked the tenth consecutive annual dividend increase for this future dividend achiever. Yield: 2.60%

Praxair, Inc. (PX) engages in the production and distribution of industrial gases primarily in North America, South America, Europe, and Asia. The company raised its quarterly dividends by 11% to 50 cents/share. This marked the eighteenth consecutive annual dividend increase for this dividend achiever. Yield: 2.20%

Rollins, Inc. (ROL), through its subsidiaries, provides pest and termite control services in North America. The company raised its quarterly dividends by 16.70% to 7 cents/share. This marked the ninth consecutive annual dividend increase for this future dividend achiever. Yield: 1.50%

National Instruments Corporation (NATI) manufactures and supplies measurement and automation products. The company raised its quarterly dividends by 15.40% to 15 cents/share. This marked the ninth consecutive annual dividend increase for this future dividend achiever. Yield: 1.40%

Energen Corporation (EGN), an energy holding company, engages in the acquisition, exploration, development, and production of oil, natural gas, and natural gas liquids in the continental United States. The company raised its quarterly dividend by 3.20% to 13.50 cents/share. This marked the twenty ninth consecutive annual dividend increase for this dividend champion. Yield: 1.00%

Investors looking to create a dividend portfolio typically should apply a set of factors to screen out unfavorable candidates. The screen should include criteria such as dividend sustainability, potential for dividend growth out of earnings as well as the number of years investors can afford to wait, until the dividend income is sufficient to cover their needs. Last, but not least, investors should also avoid overpaying for stocks, since this could negatively detract from their long term financial performance.

Friday, January 28, 2011

The Procter & Gamble Company provides consumer packaged goods in the United States and internationally. The company operates in three global business units (GBUs): Beauty and Grooming, Health and Well-Being, and Household Care. The company is a dividend aristocrat which has increased distributions for 54 years in a row. One of the company’s largest investors is no other than Warren Buffett’s Berkshire Hathaway.

Over the past decade this dividend stock has delivered an annualized total return of 7.50% to its shareholders.The company has managed to deliver an average increase in EPS of 14.50% per year since 2000. Analysts expect Procter & Gamble to earn $3.98 per share in 2011 and $4.37 per share in 2012. This would be a nice increase from the $3.53/share the company earned in 2010.Procter & Gamble is an example of the perfect dividend growth stock. It has strong brand recognition, solid competitive advantages as well as a diverse portfolio of products sold throughout the world. The company strives to generate cost savings, tries to grow through innovation and through acquisitions, while carefully managing the cash flow in order to pay dividends and buy back stock consistently. The company has the benefit of its large scale and sells a diverse number of products that have a broad geographic reach. The company has a consistent revenue stream and is targeting earnings per share growth in the high single to low double digits.The company’s return on equity decreased sharply after the acquisition of Gillette in 2005. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.The annual dividend payment in US dollars has increased by 10% per year since 2000. A 10% growth in distributions translates into the dividend payment doubling every seven years. If we look at historical data, going as far back as 1975, we see that Procter & Gamble has indeed managed to double its dividend every seven years on average.

After decreasing steadily throughout the decade, the dividend payout ratio increased above 50%, mainly on low EPS growth during the 2007- 2009 recession. Based off forward FY 2010 EPS however, the dividend is adequately covered from earnings. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.Currently, Procter & Gamble is attractively valued at 16 times earnings, yields 2.90% and has a sustainable dividend payout. I would continue monitoring the stock and will consider adding to a position in the stock on dips.

Wednesday, January 26, 2011

Dividend stocks have managed to outperform non-dividend stocks since 1972. In addition to that, elite dividend indexes such as the Dividend Aristocrats and Dividend Achievers have also managed to outperform the market for almost two decades. Many companies have managed to grow earnings sufficiently enough in order to be able to create a long record of consecutive annual dividend raises. Some investors however are worried, that the last two decades worth of dividend investing data is an aberration, and as a result should not be included in one’s investment decisions.

Another issue with dividend investing is that nothing is set in stone and permanent. The companies with the longest streaks of consecutive dividend increases of the 1990’s have either been acquired, stopped raising dividends or even worse – eliminated them. This is a particular warning sign for many investors, which prevents them from investing in some of the best dividend stocks such as Johnson & Johnson (JNJ), Coca Cola (KO) or Procter & Gamble (PG).

The truth is that nobody knows which companies would perform well over the next few decades. What investors could do is try to identify businesses that make sense in most economic environments, that have wide moats, low earnings volatility, a balance between distributing and reinvesting earnings and which are also trading at attractive valuations. Being diversified doesn’t really detract from performance, and could smooth out volatility in one’s portfolio income stream. Choosing companies which have a history of at least a decade of dividend increases won’t hurt either – companies which generate excess cash flows after reinvesting to sustain and expand the business and share the money with shareholders in the form of dividends are rare but valuable species in today’s market. Things will change over time, and as a result investors would likely have some turnover in their portfolios. While Johnson & Johnson (JNJ) might stop raising dividends a few years from now, it might still be at least a hold for long-term investors.

My main sell rule is to sell when the dividend is cut. If Johnson & Johnson (JNJ) cuts distributions, I would sell and purchase a position in a company which possesses the characteristics that Johnson & Johnson has today. Being flexible and researching companies which could grow earnings and dividends for potential acquisition is a must for dividend investors.

While the economies of the US, Europe and Japan have not been growing by much over the past decade, emerging markets could spur growth for earnings of international companies such as Johnson & Johnson (JNJ), Procter & Gamble (PG) or Coca Cola (KO). This could drive future dividend increases as well, since the emergence of middle class on a global scale would boost consumption for such consumer products. By being flexible and keeping up with the fundamentals behind dividend stocks, one could also be ahead of the game and not be surprised if a dividend is indeed cut. For example, even during the worst financial crisis since the Great Depression, despite having one dividend cut in 2008 and two in 2009, my dividend income stream still managed to increase. The reason was that I hold almost 40 individual dividend stocks, I do not concentrate too much on a given sector and I pick stocks that raise dividends, which I reinvest selectively. In an equally weighted stock portfolio consisting of 40 stocks where one component eliminates dividends, my dividend income would increase if on average dividends increase by more than 2.40% for the year.

Being flexible and keeping up with what is going on in your portfolio is not a prerequisite however. Even if one just holds on to their diversified portfolio of stocks without doing anything over time, through good times or bad, they would likely do just as well as the market over time. The list of the original S&P 500 companies from 1957 for example has managed to not only match, but outperform the market benchmark over the next half a century.

Monday, January 24, 2011

Stock prices represent the amount you pay today for the future stream of dividends and proceeds from share sales. In fact, investors can realize a return on their investment either by selling or by collecting a dividend. Investors who rely exclusively on capital gains might have their patience tested during bear markets which is just one example of a situation where the market price might not reflect the true value of a stock. Dividends on the other hand provide a direct link between a company’s fortunes and shareholder returns, which are not dependent on Wall Street. In fact, dividends unlock value in stocks since they are paid out of earnings and it is only companies who can afford to pay dividends that typically make regular distributions. In addition to that, dividends provide a rate of return that is much less volatile than capital gains. As a result dividends deliver a positive return through any market conditions. A rising distribution therefore is a result of improved business conditions at the company you have invested in, which increases future returns and values.

The following consistent dividend raisers delivered higher distributions to their loyal shareholders over the past week:

Kinder Morgan Energy Partners, L.P. KMP) owns and manages energy transportation and storage assets in North America. This master limited partnership increased its quarterly distribution to $1.13/unit, which was 1.80% higher than the previous quarter and 7.60% higher than the distribution from Q1 2010. This dividend achiever has increased consistently distributions for 15 years in a row. Yield: 6.30% (analysis)

ONEOK, Inc. (OKE), a diversified energy company, operates as a natural gas distributor primarily in the United States. The company operates in three segments: ONEOK Partners, Distribution, and Energy Services. ONEOK raised its quarterly distributions by 8% to 52 cents/share. The company has raised distributions for nine years in a row. Yield: 3.60% (analysis)

ONEOK Partners, L.P. (OKS) engages in the gathering, processing, storage, and transportation of natural gas in the United States. ONEOK (OKE) is the general partner of ONEOK Partners L.P (OKS). This master limited partnership raised its quarterly distributions to $1.14/unit, which was 0.80% higher than the previous quarter and 3.60% higher than the distribution from Q1 2010. The company has raised distributions for five consecutive years. Yield: 5.70%

Family Dollar Stores, Inc. (FDO) operates a chain of self-service retail discount stores primarily for low and middle income consumers in the United States. The company raised quarterly distributions by 16% to 18 cents/share. Family Dollar Stores is a member of the dividend aristocrats index, and this dividend increase marked the 35th consecutive annual dividend increase for the company. Yield : 1.60% (analysis)

The McGraw-Hill Companies, Inc. (MHP) provides information services and products to the education, financial services, and business information markets worldwide. It operates in three segments: McGraw-Hill Education, Financial Services, and Information & Media. The company raised its quarterly dividends by 6.40% to 25 cents/share. This marked the 38th consecutive annual dividend increase for this dividend aristocrat. Yield: 2.60% (analysis)

Linear Technology Corporation (LLTC), together with its subsidiaries, engages in the design, manufacture, and marketing of linear integrated circuits worldwide. The company’s Board of Directors approved a 5.50% hike in quarterly distributions to 24 cents/share. This marked the 19th consecutive annual dividend increase for this dividend achiever. Yield: 2.70%

Enterprise Bancorp, Inc. (EBTC) operates as the holding company for Enterprise Bank and Trust Company that provides various banking products and services primarily in Merrimack Valley and north central regions of Massachusetts, and south central New Hampshire. The company raised its quarterly distribution by 5% to 10.50 cents/share. This marked the sixteenth consecutive annual dividend increase for the company. Yield: 3%

Airgas, Inc. (ARG), through its subsidiaries, distributes industrial, medical, and specialty gases, as well as hardgoods in the United States. The company announced a 16% increase in its quarterly dividend to 29 cents/share. Airgas has raised dividends for nine years in a row. Yield: 1.80%

StoneMor Partners L.P. (STON), together with its subsidiaries, engages in the ownership and operation of cemeteries in the United States. The company operates in two segments, Cemetery Operations and Funeral Homes. StoneMor announced a 1.80% hike over its previous quarter distribution to 57.50 cents/unit. This master limited partnership has raised distributions for 6 years in a row. Yield: 7.50%

Bar Harbor Bankshares (BHB) operates as the holding company for Bar Harbor Bank & Trust that offers various banking products and services to individuals, businesses, not-for-profit organizations, and municipalities in Hancock, Washington, and Knox Counties. The company raised its quarterly distribution by 1.90% to 27 cents/share. This marked the eight consecutive annual dividend increase for the company. Yield: 3.60%

Pall Corporation (PLL) manufactures and markets filtration, purification, and separation products and integrated systems solutions worldwide. The company announced a 9.40% raise in its quarterly dividends to 17.50 cents /share. This marked the seventh consecutive annual dividend increase for the stock. Yield: 1.40%

Of the companies listed above, I find ONEOK Inc (OKE), Kinder Morgan Partners (KMP) and McGraw Hill (MHP) attractively valued at the moment. In fact, I recently added to my position in the first two stocks. Linear Technology (LLTC) is one of the few tech companies which have raised distributions for close to two decades, which means that I will place it on my list for further research. Despite the fact that the stock seems overvalued by my standards, my yield on cost on Family Dollar (FDO) is 2.90%. It has also been one of the best performers in my dividend portfolio since 2008. I would consider adding to my position in the stock if it ever yields 2%, mainly due to its strong dividend growth.

Friday, January 21, 2011

Kinder Morgan Energy Partners, L.P. owns and manages energy transportation and storage assets in North America. Kinder Morgan is a dividend achiever as well as a component of the S&P 500 index. It has increased distributions for the past 14 years.

For the past decade this dividend stock has delivered annualized total returns of 19.50 % to its unitholders.At the same time company has managed to deliver an 11.30% average annual increase in its cash flow per share since 2000. The company has several projects worth $6 billion in its pipeline, which should add to incremental distributable cash flow per unit over the next few years. The Rockies Express Pipeline and the Kinder Morgan Louisiana Pipeline would help KMP benefit from increased natural gas production in the Rockies. The Midcontinent Express pipeline which is a joint venture with Energy Transfer Partners (ETP) is another project that should add to distributable cash flow per unit in the future.

The return on has mostly remained above 20% for the latter part of the past decade.

Annual distributions have increased by 11.30% on average over the past 10 years.A 12% growth in distributions translates into the distributions payment doubling almost every six years. If we look at historical data, going as far back as 1993, we would see that Kinder Morgan has actually managed to double its distribution every five years on average.Over the past decade the distribution payout ratio has been rather stable between 50% and 60%, with the exception of a brief spike in 2007. For this company I used the ratio of current cash flow/unit to the annual distribution/unit. A lower payout is always a plus, since it leaves room for consistent distribution growth minimizing the impact of short-term fluctuations in earnings.The main risks for Kinder Morgan include increase in interest rates, which would increase the company’s borrowing costs to finance future projects and make its units less attractive to investors seeking its fat yield. Another risk could include adverse change in the legal structure of master limited partnerships, similar to what has happened to Canadian Royalty trusts. Thus investors should be careful not to have an overweight exposure to Kinder Morgan and Master Limited Partnerships in their portfolios.In addition to that as a mature MLP, the company distributes 50% of incremental cash flows to the general partner, which is higher in comparison to other pipeline operators.

Overall I think that Kinder Morgan is an attractive option for investors seeking current income as well as for those seeking future distribution growth as well. The company currently yields 6.30% and recently announced that it expects to raise its annual distributions to $4.60/unit from this year’s $4.40/unit. The company does have enough distributable cash flow to cover its distributions, in addition to having a stable toll booth type income streams from its pipeline operations. I would consider adding to my position in Kinder Morgan Partners on dips.

Wednesday, January 19, 2011

Peter Lynch, the legendary manager of the Fidelity Magellan Fund has mentioned the following about dividend achievers:

"The Dividend Achievers Handbook is one of my favorite bedside thrillers. Here's a simple way to succeed in Wall Street: Buy the stocks on Mergent's list and stick with them as long as they stay on the list"

The stocks he mentions in his book, "One Up on Wall Street", is Automatic Data Processing (ADP), which incidentally has kept raising distributions 20 years after his book was published.

In fact some of the best performing stocks on Wall Street over the past decade have been the dividend achievers. Dividend achievers are companies which have increased their distributions for at least ten consecutive years. They provide a superior alternative than investing in fixed income because they provide investors with the opportunity of a rising dividend payment and they could also receiving higher total returns over time as well. The premise is that higher dividends are a direct result of rising earnings, which translates into higher stock prices. When managements boost distributions, this shows what their outlook for the business and the economy really is.

Over the past decade, the broad dividend achievers index has delivered annual total returns of 1.20%, which was better than the flat annual returns realized by the S&P 500.

Currently, there are approximately 212 stocks in the index. The ten largest holdings include:

Exxon Mobil Corporation (XOM) engages in the exploration, production, transportation, and sale of crude oil and natural gas. The company has managed to raise dividends for 28 years in a row.(analysis)

International Business Machines Corporation (IBM) develops and manufactures information technology (IT) products and services worldwide. The company has managed to raise dividends for 15 years in a row. (analysis)

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company operates in three global business units (GBUs): Beauty and Grooming, Health and Well-Being, and Household Care. The company has managed to raise dividends for 54 years in a row. (analysis)

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. The company has managed to raise dividends for 48 years in a row. (analysis)

Chevron Corporation (CVX) operates as an integrated energy company worldwide. The company has managed to raise dividends for 23 years in a row. (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company has managed to raise dividends for 36 years in a row. (analysis)

AT&T Inc. (T) provides telecommunication products and services to consumers, businesses, and other telecommunication service providers under the AT&T brand worldwide. The company has managed to raise dividends for 27 years in a row. (analysis)

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide.The company has managed to raise dividends for 48 years in a row. (analysis)

PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company has managed to raise dividends for 38 years in a row. (analysis)

McDonald's Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. The company has managed to raise dividends for 34 years in a row. (analysis)

There are several funds focusing on the dividend achievers index. One of them is the Powershares Dividend Achievers (PFM), which will normally invest at least 90% of its total assets in dividend paying common stocks that comprise Index. This ETF has an annual expense of 0.60%.

The BlackRock Dividend Achievers Trust (BDV) is a diversified closed-end management investment company. The Trust invests substantially all, but not less than 80%, of its total assets in common stocks that are included in Indxis's universe of "Dividend Achievers". The fund follows a managed distribution policy, which include both return of capital and dividends. It also has an annual fee of 0.86%.

Because of the steep annual fees on those funds, I typically end up constructing my own dividend portfolios. In the era of low or no commission internet stock brokerages, investors could easily save on annual fees, which add up over the long run.

Monday, January 17, 2011

Dividend investors typically face a tradeoff between dividend yield and dividend growth. Companies with high yields often keep distributions unchanged or do not increase them at a rate that would compensate for the eroding power of inflation. Because of the higher yields, retirees tend to prefer the higher yield today. The companies with low yields on the other hand typically can afford to grow distributions much faster than the rate of inflation. Younger investors typically invest in these dividend growth stocks, in order to generate a sufficient yield on cost down the road.

The dividend growth companies that raised distributions last week were no exception:

Enterprise Products Partners L.P. (EPD) provides a range of services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals in the continental United States, Canada, and Gulf of Mexico. This master limited partnership announced a 1.30% increase in its quarterly distributions to 59 cents/unit. This was also a 5.40% increase over the Q1 2010 distribution. This dividend achiever has raised distributions every year since going public in 1998. Yield: 5.50% (analysis)

Plains All American Pipeline, L.P. (PAA), through its subsidiaries, engages in the transportation, storage, terminalling, and marketing of crude oil, refined products, and liquefied petroleum gas and other natural gas-related petroleum products (LPG) in the United States and Canada. This master limited partnership announced a 0.80% increase in its quarterly distributions to 95.75 cents/unit. This was also a 3.20% increase over the Q1 2010 distribution. This dividend achiever has raised distributions every year since going public in 1999. Yield: 5.90%

Genesis Energy, L.P. (GEL), together with its subsidiaries, operates in the midstream segment of the oil and gas industry in the Gulf Coast area of the United States. The company operates through four divisions: Pipeline Transportation, Refinery Services, Industrial Gases, and Supply and Logistics. This master limited partnership announced a 3.20% increase in its quarterly distributions to 40 cents/unit. This was also a 11.10% increase over the Q1 2010 distribution. In addition to that Genesis Energy announced the elimination of its incentive distribution rights to the general partner. This MLP has raised distributions for seven years in a row. Yield: 5.90%

Shaw Communications Inc. (SJR), a diversified communications company, provides broadband cable television, Internet, digital phone, telecommunications, and satellite direct-to-home (DTH) services primarily in Canada and the United States. The company increased monthly dividends by 5% to 7.67 canadian cents/share. Shaw Communications is a member of the international dividend achievers index, and has increased dividends for 9 years in a row. Yield: 4.40%

Alliant Energy Corporation (LNT) operates in electric and gas utility businesses in the United States. The company announced a 13% raise in its quarterly dividends to 42.50 cents/share. This was the ninth consecutive dividend increase for Alliant Energy. Yield: 4.50%

CVS Caremark Corporation (CVS) operates as a pharmacy services company in the United States. It operates in two segments, Pharmacy Services and Retail Pharmacy. The company announced a 43% raise in its quarterly dividends to 12.50 cents/share. This was the eight consecutive dividend increase for CVS Caremark. Yield: 1.40%

Most of the companies which raised distributions last week, and have raised distributions for over 5 years, were high dividend stocks such as master limited partnerships, utilities and telecoms. While their current yields are high, their dividend growth rates have been low. CVS on the other hand has a low current yield, however the dividend has been rising quickly. Just like anything in life, a balanced approach to include high yield stocks with low dividend growth, low yield stocks with high dividend growth and stocks with moderate yields and growth would ensure that investors receive a diversified income stream which provides sufficient current dividend income today, while also providing a decent dividend growth over time.

Friday, January 14, 2011

Unilever PLC provides fast-moving consumer goods in Asia, Africa, Europe, and Latin America. This international dividend achiever has increased distributions for over one decade.

Over the past decade this dividend growth stock has delivered an annualized total return of 7.70% to its shareholders.

One odd fact about Unilever is that it trades in the UK and the Netherlands. In this analysis I am concentrating on the British based, American Depositary Receipts. Unilever operates as a single business entity. However, there are two owners: Unilever (NV) and Unilever (PLC) which are the two parent companies of the Unilever Group, having separate legal identities and separate stock exchange listings for their shares. You can find Unilever shares trading on NYSE as (UN) or (UL) representing NV and PLC respectively. (source)

The company has managed to deliver an average increase in EPS of 19.30% per year since 2000. Analysts expect Unilever to earn $2.28 per share in 2010 and $2.22 per share in 2011. This would be a nice increase from the $1.62/share the company earned in 2009. The large annualized increase in earnings per share was mainly due to the fact that EPS was depressed in 2000 and subsequently recovered. Future growth in EPS would depend on how the company balances its pricing with the need for volume growth in its segments. The company has a target growth in sales of 3%- 5% per year. It has been active in the acquisition front, most recently by acquiring Alberto Culver (ACV) and Sara Lee’s (SLE) body care business unit.The company has a high return on equity, which has remained above 27% for the latter part of the past decade. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.The annual dividend payment in US dollars has increased by 10.10% per year since 2000. A 10% growth in distributions translates into the dividend payment doubling every seven years. With international dividend achievers, it is important to look at the history of dividend increases in the local currency, in order to avoid any confusion about the volatility of US dollar dividend payments, caused by currency fluctuations. The company’s dividend history in British pounds shows consistent pattern of distribution increases since 1999.

The dividend payout ratio has decreased steadily over the past decade, although it stayed below 50% only in 2008. Based off forward FY 2010 EPS however, the dividend is adequately covered from earnings. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.Currently, Unilever is attractively valued at 13.50 times 2010 earnings, yields 3.80% and has a sustainable dividend payout. I would continue monitoring the stock and will consider adding to a position in the stock on dips.

Wednesday, January 12, 2011

The process of successful dividend investing is all about identifying outstanding companies, with wide moats and characterized by strong brand appeal. These companies should also be able to generate a rising stream of earnings and cashflow which would fund a growing dividend, that would create an income stream for investors that rises faster than inflation. Investors should be careful however only to select these dividend investments, which trade at reasonable valuations. One of the major reasons why US stocks have delivered almost no total returns over the past decade is because they were grossly overvalued in the late 1990’s and early 2000s. Even selecting an outstanding business like Coca-Cola (KO) one decade ago for investment would have led to low returns, because the stock was overvalued.

Back at the end of 2000, the stock was trading at $60.94, yielded 1.10% and had a P/E of 69 times earnings. As of this Friday Coca-Cola (KO) is trading at $62.92. If you add in dividends, the total returns add up to 31.60% over the past decade. Right now the company is attractively valued at a P/E of 19.40 and yielding 2.80%.

With the markets trading at their highest levels since September 2008, the pool of attractively valued dividend stocks is shrinking. Many investors are faced with the dilemma of whether to keep adding to undervalued positions which are overweight in their portfolios or simply to either remain in cash or purchase stocks that seem overpriced. As a result, it might not be a bad idea to further research stocks which are just a bit away from your entry criteria. I have highlighted seven dividend aristocrats, where I plan to add to my existing position on dips below the entry prices specified in the table:

Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), provides supplemental health and life insurance. The company derives almost 75% of its revenues from its operations in Japan, while the remaining 25% are generated in the US. In FY 2009 the company earned $3.19/share. For FY 2010 and FY 2011 it is expected to earn $5.55/share and $6.18/share. I would consider adding to my position in the stock on weakness below $48. (analysis)

Air Products and Chemicals, Inc. (APD) offers atmospheric gases, process and specialty gases, performance materials, and equipment and services worldwide. For FY 2010 the company earned $4.74/share. For FY 2011 and FY 2012 it is expected to earn $5.65/share and $6.31/share. I would consider adding to my position in the stock on weakness below $78.40. (analysis)

Wal-Mart Stores, Inc. (WMT), which is the largest retailer in North America, operates retail stores in various formats worldwide. In 2010 the company derived a quarter of its revenues from its international operations, which are expect to grow much faster than domestic sales. In FY 2010 the company earned $3.72/share. For FY 2011 and FY 2012 it is expected to earn $4.05/share and $4.45/share. I would consider adding to my position in the stock on weakness below $48.40. (analysis)

Exxon Mobil Corporation (XOM) engages in the exploration, production, transportation, and sale of crude oil and natural gas. It also involves in the manufacture, transportation, and sale of petroleum products. In FY 2009 the company earned $3.98/share. In FY 2010 and FY 2011 it is expected to earn $5.87/share and $6.46/share. I would consider adding to my position in the stock on weakness below $70.40. (analysis)

Emerson Electric Co. (EMR), a diversified global technology company, engages in designing and supplying product technology, as well as delivering engineering services and solutions to various industrial, commercial, and consumer markets worldwide. The company operates in five primary business segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Appliance and Tools. In FY 2010 the company earned $2.61/share. For FY 2011 and FY 2012 it is expected to earn $3.26/share and $3.78/share. I would consider adding to my position in the stock on weakness below $55.20. (analysis)

McCormick & Company, Incorporated (MKC) engages in the manufacture, marketing, and distribution of flavor products and other specialty food products to the food industry worldwide. It operates in two segments, Consumer and Industrial. The company derives almost 60% of its sales from the US. For FY 2009 the company earned $2.27/share. For FY 2010 and FY 2011 it is expected to earn $2.61/share and $2.81/share. I would consider adding to my position in the stock on weakness below $44.80. (analysis)

3M Company (MMM), together with its subsidiaries, operates as a diversified technology company worldwide. It operates in six segments: Industrial and Transportation; Health Care; Consumer and Office; Safety, Security and Protection Services; Display and Graphics; and Electro and Communications. In FY 2009 the company earned $2.27/share. Earnings per share are expected to increase to $5.73 in FY 2010 and $6.17 by FY 2011. I would consider adding to my position in the stock on weakness below $84. (analysis)

The above selections would be best described as great companies whose stock might have gotten a little ahead of itself. Other than that, all seven stocks are expected to generate increasing earnings over in the foreseeable future, which should assist them in raising dividends like clockwork. In order to avoid overpaying, dividend investors should only consider initiating or adding to their existing positions on any weakness.

Proper position entry at attractive valuations is just one of the items dividend investors should consider in order to ensure maximum chance of success in income investing. Proper portfolio diversification is another item that would ensure that a portfolio is not overcommitted to a certain sector or individual security. Investors should also avoid placing all of their bets at the same time, but should rather spread them over time. Last but not least, investors should try to selectively reinvest dividends in the best investment situations, rather than reinvest distributions blindly into the same overvalued stock for example.

Monday, January 10, 2011

With the low number of quality companies raising distributions in the last week of the year, I decided to focus on the companies which have a high chance of growing distributions in 2011. The companies that manage to grow distributions for a long period of time have a very high chance of continuing their streak of consecutive dividend increases, until something unexpected happens. In order for a company to be able to grow dividends for over one decade it has to have recorded earnings growth. Consistent earnings growth is only possible if the company has a wide moat or a strong competitive advantages based on price, quality or a combination of both. Most dividend growth stocks also boast high returns on equity and generate so much in excess cash, that prudent managers allocate a portion of it back to shareholders in the form of dividends. The companies which I expect to boost dividends to shareholders in 2011 and beyond include:

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. Wal-Mart Stores last raised its quarterly dividend by 11% to 30.25 cents/share in March 2010. Wal-Mart has increased its dividend for 36 years in a row. This dividend aristocrat company boasts a ten year dividend growth rate of 18.10% annually. Yield: 2.20% (analysis)

Walgreen Co. (WAG) , together with its subsidiaries, engages in the operation of a chain of drugstores in the United States. The company’s drugstores sell prescription and non-prescription drugs, and general merchandise. Walgreen last raised its quarterly dividend by 27.30% to 17.50 cents/share in July 2010. Walgreen has raised its dividend for 35 consecutive years This dividend aristocrat boasts a ten year dividend growth rate of 14.30% annually. Yield: 1.90% (analysis)

Medtronic, Inc. (MDT) manufactures and sells device-based medical therapies worldwide. Medtronic last raised its quarterly dividend by 9.80% to 22.50 cents/share in June 2010. Medtronic has raised its dividend for 33 years in a row. This dividend champion has a ten year dividend growth rate of 18.40% annually. Yield: 2.40% (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. McDonald’s last raised its quarterly dividend by 10.90% to 61 cents/share in September 2010. McDonald’s has raised its dividend for 34 consecutive years. This dividend aristocrat boasts a ten year dividend growth rate of 26.50% annually. Yield: 3.20% (analysis)

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets in North America. Kinder Morgan Energy Partners last raised its quarterly distributions by 1.80% to $1.11 per unit in October 2010. Kinder Morgan has raised its distributions for 14 consecutive years. This dividend achiever boasts a ten year dividend growth rate of 11.70% annually. Yield: 6.40% (analysis)

Kimberly-Clark Corporation (KMB) , together with its subsidiaries, engages in the manufacture and marketing of various health care products worldwide. Kimberly-Clark last raised its quarterly dividend by 10% to 66 cents/share in March 2010. Kimberly-Clark has raised its dividend for 38 consecutive years. This dividend aristocrat boasts a ten year dividend growth rate of 8.70% annually. Yield: 4.20% (analysis)

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. It principally offers sparkling and still beverages. Coca-Cola last raised its quarterly dividend by 7.30% to 44 cents/share in February 2010. Coca-Cola has raised its dividend for 48 consecutive years. This dividend aristocrat boasts a ten year dividend growth rate of 9.90% annually. Yield: 2.70% (analysis)

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. Colgate-Palmolive last raised its quarterly dividend by 20.40% to 53 cents/share in February 2010. Colgate-Palmolive has raised its dividend for 47 consecutive years. This dividend champion boasts a ten year dividend growth rate of 11.30% annually. Yield: 2.60 % (analysis)

In dividend investing, it is important to keep a close look at the long term picture behind each company you are investing in. As a result, the stocks mentioned above should purchased only after investors analyze them and assess that the probability for future dividend growth of over one year is high. I would not purchase a stock just because it would raise a dividend for one year. I would purchase a quality dividend stock only if I see it fit to generate higher yield on cost in the future for me.

Over the past decade this dividend growth stock has delivered an annualized total return of 9.40% to its shareholders.The company has managed to deliver an average increase in EPS of 8.20% per year since 2000. Analysts expect Diageo to earn $4.97 per share in 2011 and $5.50 per share in 2012. This would be a nice increase from the $4.18/share the company earned in 2010. The company’s premium spirits brands have been popular with US consumers who traded up to these premium brands. The North American market accounts for 34% of the company’s sales, while emerging markets account for 33% of its sales. Emerging markets have been a bright spot, as the company has been able to achieve strong double digit growth there. The company competes based on brand loyalty and offering quality products. It’s a typical consumer play where it tries to boost organic sales while also acquiring premium brands in order to further boost its competitiveness. Cost restructurings and efficiencies are another part of Diageo’s strategy for future earnings growth as well.The company has a high return on equity, which has remained above 33% for the latter part of the past decade. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.The annual dividend payment in US dollars has increased by 5.70% per year since 2000. A 6% growth in distributions translates into the dividend payment doubling every twelve years. With international dividend achievers, it is important to look at the history of dividend increases in the local currency, in order to avoid any confusion about the volatility of US dollar dividend payments, caused by currency fluctuations. The company’s dividend history in British pounds shows consistent pattern of distribution increases since 1998. Another fact to look for is that Diageo pays an interim and a final dividend, which are not equal in amount. In order to avoid confusion, dividend investors should look at the full year payments in order to determine whether the company is an achiever or not.

The dividend payout ratio has increased slightly over the past decade, having exceeded 50% in 2006 and 2007. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.Currently, Diageo is attractively valued at 17.50 times earnings, yields 3.30% and has a sustainable dividend payout. I would continue monitoring the stock and will consider adding to a position in the stock on dips.

Wednesday, January 5, 2011

With the end of the financial crisis of 2007-2009, and unemployment leveling off, investors are once again bullish on stocks. The stock market, which many economists consider to be a leading indicator of the economy, is trading at its highest levels in over two years. Apart from the so called PIGS – Portugal, Ireland, Greece and Spain, the world economy is headed for another year of positive GDP growth in 2011. The most notable economic rebound is seen in the emerging market powerhouses like Brazil, China and India, where the growing number of middle class consumers is generating higher profits for the companies featured below. Overall, growth in the world economy translates into consumers increasing their discretionary spending and trading up from generic brands to brand name products.

The companies that could benefit from the increase in consumer spending all have diversified portfolios of strong brand names, wide moats and high returns on equity. Their strong fundamentals have enabled them to weather several recessions over the past 2 decades and have also allowed them to increase dividends for over a quarter of a century. The companies that could benefit from increased consumer spending include:

Wal-Mart Stores (WMT) is the world’s largest retailer, which operates retail stores in various formats in the US and worldwide. The company has raised distributions for 36 years in a row and yields 2.30%. I would add to my position in the company on dips below $49. Check my analysis of the stock.

PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company operates in four divisions: PepsiCo Americas Foods (PAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe, and PepsiCo Asia, Middle East and Africa (AMEA). PAF divisions. The company has raised distributions for 38 years in a row and yields 2.90%. The company is attractively valued at the moment at 16.60 times earnings. Check my analysis of the stock.

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. The company has consistently raised distributions for 48 years in a row and yields 3.50%. The company is attractively valued at the moment at 12.80 times earnings. Check my analysis of the stock.

The Clorox Company (CLX) engages in the production, marketing, and sales of consumer products in the United States and internationally. The company operates through four segments: Cleaning, Lifestyle, Household, and International. The company has regularly raised distributions for 33 years in a row and yields 3.50%. The company is attractively valued at the moment at 14.30 times earnings. Check my analysis of the stock.

McDonald’s Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. The company has raised distributions for 34 years in a row and yields 3.20%. The company is attractively valued at the moment at 17 times earnings. Check my analysis of the stock.

Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in the manufacture and marketing of various health care products worldwide. The company operates in four segments: Personal Care, Consumer Tissue, K-C Professional & Other, and Health Care. The company has raised distributions for 38 consecutive years and yields 4.20%. The company is attractively valued at the moment at14.30 times earnings. Check my analysis of the stock.

The sustainable dividends that these defensive companies are paying would certainly provide a cushion if the market goes down or stays flat throughout 2011. A continuation of the bullish performance of 2010 this year would most likely lift these stocks as well, leading to strong capital gains in the process. The diversified revenue streams of their products and their global reach would help these companies withstand any economic conditions. Any decline in the underlying stock prices is an opportunity to initiate or add to existing positions.

Monday, January 3, 2011

Back in 2009, I selected four high yield dividend stocks in order to participate in a stock picking competition. The companies selected have diversified income streams, high dividend yields and were characterized by stable revenues. Three of the companies had recession proof products or services. This ensured that investors would keep receiving their dividends and earn a return on their investment throughout all market conditions.

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company has long term leases with tenants, which ensures stability of revenues over time. In addition to that, the properties it collects revenues from are located in 49 states. This real estate investment trust is one of the few which didn’t cut distributions during the financial crisis. Yield: 5% (analysis)

Consolidated Edison, Inc. (ED), through its subsidiaries, provides electric, gas, and steam utility services in the United States. Utility revenues are stable even during recessions, but don’t increase by much during expansions. Utility companies are natural monopolies in their geographic areas, and typically earn a return on their capital investment that is set by the state they are operating in. Yield: 4.80% (analysis)

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets in North America. Pipelines are regulated by the FERC and the transportation rates for oil and gas that flow through them typically increase at the rate of inflation and are not dependent on the volatile price of the underlying. While energy prices are highly volatile, the amount of oil and gas consumed in the US typically changes by a few percentage points every year. Yield: 6.30%(analysis)

Philip Morris International Inc. (PM), through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. The number of smokers is decreasing in Western Europe, although the price increases have been able to offset any declines in revenues. In addition to that, growth in emerging markets for the brand products the company is producing should boost profitability in the long run. Strategic acquisitions should also add to the bottom line, as would synergies and strategic cost efficiencies are realized over time. Yield: 4.30% (analysis)

2010 could be characterized by the lowest bond yields in several decades. This has caused some investors to shift their portfolios toward dividend stocks. The positive side of most dividend stocks is that unlike fixed income, they could increase their distributions over time. As a result some high dividend stocks such as the ones I selected in 2010 had a very good performance this year. The positive fact of dividend stocks with strong fundamentals is that investors receive a growing stream of dividend income in all market conditions. With even modest capital gains and regular dividend reinvestment, investors could achieve consistent returns over the long haul, which could compound their original investment for many years.

Two of the companies, Con Edison (ED) and Realty Income (O) seem to be trading a little ahead of themselves. As a result I find it difficult to commit new money to them at this moment. The other two companies, Kinder Morgan (KMP) and Philip Morris International (PM) look attractively valued at the moment given their bullish growth prospects and attractive fundamentals. As parto f 2011’s stock picking competition I selected Philip Morris International (PM), Johnson & Johnson (JNJ), Procter & Gamble (PG) and PepsiCo (PEP). You can read the article explaining the reasoning behind these picks here.

Overall, the four stocks delivered a total return of 26.10% in 2010. In comparison, the S&P 500 delivered a total return of 14.60% in 2010. This placed me third in the competition. You could find the results for the other bloggers below:

While I own all of the stocks mentioned above, this stock picking competition is not representative of how investors should invest money. I believe that in order to be successful at dividend investing, one has to build a diversified portfolio of stocks, representative of as many sectors as possible. I would also add geographic diversification as a plus, as well as the need to build positions slowly over time, by dollar cost averaging.

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